Why investors cannot get enough of the Cambridge tech market
Amid deep concerns over the global economic impact of Covid-19, investors have continued to pile money into Cambridge.
The Cambridge Independent has reported on a string of huge investments into science and technology companies in the region since March.
Stewart Frost, a banker within the wealth management team at J P Morgan Private Bank, suggests the city has become more attractive to investors than ever because the pandemic has brought the value of its expertise into sharp focus.
“Cambridge is heavily geared towards those sectors – technology, healthcare, AI and biotech – that have performed very well during the Covid crisis, because they are becoming more and more relevant on a day-to-day basis as we all think about how we embrace technology, either to make our lives easier or more efficient,” he tells the Cambridge Independent.
In some fields – such as the development of new therapeutics or diagnostic tools – the connection to the world’s most pressing needs is obvious.
But Stewart believes there is also a change of mindset.
“There’s been a reset. It’s clear that people want to rebuild in a better way than we had in the past, whether that is about sustainability, our footprints as individuals and companies, and maintaining a healthy lifestyle and a healthier work-life balance than we had in the past,” he says.
“This is all coming together in Cambridge, where it is very much part of the DNA. Cambridge is one of those areas where there is a lot of focus from the government on how we can develop and grow the leading technology and healthcare companies of the future.”
From cleantech to edtech, AI to agritech, Cambridge’s engineering excellence ranges across fields that will shape the post-Covid landscape in a multitude of ways.
Few places can boast a more powerful engine of innovation than the University of Cambridge, of course, and companies born from technology developed under its wing are among those to have attracted significant support this year.
“Cambridge has got the mix right between the academic world, as a driver of innovation, and the ability to nurture and grow fantastic entrepreneurs though the Science Park or the networks that exist.
“It’s a model that has been incredibly successful and other cities are looking at it to see how they can replicate it,” says Stewart.
But while investors are piling in, the pandemic has prompted some business owners to bring forward their exit plans.
“Government is going to have to pay for all the significant help it’s provided to the economy in recent months, so there is a view that it is almost inevitable that taxes will have to rise,” Stewart notes.
“Your starting point might be that if you were thinking of selling your business, you may accelerate that. We are already seeing entrepreneurs’ relief in focus...”
Indeed, in November, the Office of Tax Simplification (OTS) published a report on capital gains tax, designed to advise on reforms, which recommended a tightening of the requirements needed to qualify for business asset disposal relief, formerly known as entrepreneurs’ relief.
For other clients, the focus has been on liquidity and access to financing, from credit facilities to fundraising.
“People were worried until the central bank stepped in,” notes Stewart. “Would they have access to capital that they can draw on to handle a prolonged period of reduced revenue?”
For those in the sweet spot of investors’ target markets, there has been huge support.
“A lot of investors out there are desperate for those opportunities. The central banks have flooded the market with liquidity through quantitative easing but they’ve also cut interest rates to near zero around the world, so there’s a significant weight of money from high net worth individuals or institutional investors looking for secular growth opportunities, and that is where AI, technology and healthcare are relevant,” suggests Stewart.
“Our view is that it will be harder to generate returns in a number of asset classes, whether that is government debt or by holding cash in the bank, so you need to work harder to find those opportunities.
“Cambridge is geared towards sectors where investors are thinking, because that is where there is growth.”
Amid the buzz around innovative ideas, however, lies the danger of getting caught out. The risk-reward calculation for those investing in emerging technologies needs careful consideration.
“There are companies raising money at very high valuations. You need to make sure the story is real and you’re not getting caught up in the excitement,” warns Stewart.
“We have a very well-established private market investment team that do a lot of due diligence around different areas of opportunity.
“If an investor says we want your help, we will come to them with a recommendation on the best way to approach it, thinking about the fact that the risks are high and the opportunities are not particularly liquid. You want to be very confident in terms of your long-term exit plan.”
In a period of heightened investment interest, is there a danger that companies try to grow too fast, too quickly, with funding rounds that are overwhelming?
“In some of these high growth sectors, companies can get very big, very quickly,” acknowledges Stewart.
“But we work with our investment bank, who are the experts in understanding the right level of fundraising. We would help to make an introduction to our specialists and often you would refer to prior examples of such capital structures that similar businesses have been through, the pros and cons of that approach, why it may be effective in some circumstances, but also how investors might perceive it. You always need to have the longer-term vision in mind.
“What the valuations are telling us is there is so much capital out there looking for a home as a result of what’s happened in the last six months, and you can extrapolate that back to the financial crisis.
“We have to reframe what we think the new normal is. We’ve never been in an environment where something like 80 per cent developed market bonds are negative yield. In that context you can start to understand why valuations might feel so dizzy.
“It’s so hard to look for history for any comfort because we’ve never been in this interest rate environment. We try to put the meat on the bones for entrepreneurs to make them a little more comfortable.”
History is not necessarily much help, either, in helping to put value on bleeding-edge technologies. But the pandemic has yielded some insights.
“The Covid situation has been a test of major listed technology companies,” says Stewart.
“A lot of people thought these companies shouldn’t have the extreme valuations that they do. But if you look through the earnings report at who has managed to maintain and grow earnings during one of the most challenging periods we’ve ever had, it was those same companies, so the valuations were merited on those grounds.
“It’s an interesting dynamic.”
Cambridge has more than its fair share of unicorns, of course. CMR Surgical, the robotic surgery company, is one of the latest, while cybersecurity firm Darktrace is another to have hit the billion dollar valuation and shown no sign of slowing down.
Both of those companies remain firmly rooted in the Cambridge region.
But that has not always been the case. One oft-repeated slight on the Cambridge business landscape is that companies sell out to the Americans too early.
“It would be nice for some UK businesses to challenge some of the major US companies,” admits Stewart. “One of my colleagues who worked on a lot of M&A transactions said to me that fundamentally there was a difference between the UK entrepreneur and the US entrepreneur.
“Rightly or wrongly, the level of ambition was not the same and typically a UK entrepreneur would sell out at an earlier stage to a big organisation rather than feeling they can continue and drive it up to the next level to become one of the major global players.
“The US has a lot of big institutional investors and big VC firms that have been very successful at scouring the world for these opportunities and I imagine it can be quite hard to say no sometimes.”
The message to Cambridge tech companies, however, is that the future does look promising.
“This was a recession that heavily impacted some sectors more than others. It’s reassuring if you’re an entrepreneur sitting in a sector where we think there will continue to be growth no matter what happens,” notes Stewart.
“Our view economically is that it is likely the worst is over and we are cautiously optimistic. If you look at the co-ordinated central bank and policy making response, it is really meaningful.
“It saves the day and means the potential for really adverse outcomes or really negative consequences have gone down and underlines the importance of being in those sectors.
“Notwithstanding that, you need to think about access to your liquidity to cover all eventualities.”
With investors continuing to seek new homes for their money, Cambridge’s pipeline of ingenuity looks very well-placed to prosper.
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